Question

Inferring consolidation entries from consolidated financial statements-Cost method Assume a parent company acquired a subsidiary on January 1, 2012. The purchase price was $1,362,000 in excess of the subsidiary's book value of Stockholders' Equity on the acquisition date, and that excess was assigned to the following [A] assets [A] Asset Property, plant and equipment (PPE), net Patent Goodwill Original Amount Original Useful Life 20 years 12 years Indefinite $300,000 432,000 630,000 $1,362,000 The parent company uses the cost method of pre-consolidation Equity Investment bookkeeping. The Goodwill asset has been tested annually for impairment and has not been found to be impaired. Select accounts from the parent, subsidiary, and consolidated financial statements for the year ended December 31, 2016, are as follows: Parent Subsidiary Consolidated Income statement Sales Cost of goods sold Gross profit Investment income $9,075,000 $2,020,000 11,095,000 (6,534,000) (1,188,000 7,722,000) 2,541,000 832,000 3,373,000 80,800 Operating expenses (1,361,280) (514,800) (1,927,080) $1,260,520 $317,200 $1,445,920 Net income Statement of retained earnings BOY retained earnings Net income 6,614,440 1,260,520 317,200 1,445,920 (326,440) $7,262,520 $1,299,400 $7,733,920 6,328,440 1,063,000 Dividends (326,440) 80,800) Ending retained earnings Balance sheet Assets Cash Accounts receivable Inventory Equity investment Property, plant & equipment Patent list Goodwill 1,709,760 551,200 2,260,960 2,686,800 459,6003,146,400 3,520,200 589,8004,110,000 2,232,000 12,752,640 1,091,400 14,069,040 252,000 630,000 $22,901,400 $2,692,000 $24,468,400 Liabilities and stockholders' equity Accounts payable Accrued liabilities Long-term liabilities Common stock APIC Retained earnings 1,517,400 1,825,680 ,550,000 660,000 6,210,000 845,520 6,335,880 165,000 6,335,880 7,262,520 1,299,4007,733,920 $22,901,400 $2,692,000 $24,468,400 1,328,640 188,760 1,578,840 246,840 845,520 132,000 a. For the year ended December 31, 2016, explain how the parent's pre-consolidation investment income of $80,800 was determined b. Explain how the parent's December 31, 2016 pre-consolidation Equity Investment balance of $2,232,000 was determined. c. For the year ended December 31, 2016, reconcile the parent company's pre-consolidation net income of $1,260,520 to the consolidated balance of $1,445,920 Do not use negative signs with your answers d. What was the subsidiary's retained earnings balance on the acquisition date? (Hint: You will need to use an account that does not change after the acquisition date.) e. Why aren't the Stockholders' Equity accounts of the subsidiary reflected in the consolidated balance sheet? f. Provide the consolidation entries for the year ending December 31, 2016. Consolidation Journal Description Debit Credit ADJ] [E] Common Stock APIC A PPE, net Patent Patent

Answer 1

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